Client Update: 27 April 2007

Foreign shareholding in Vietnamese banks

In brief: On 20
April 2007, the Government of Vietnam passed Decree 69/2007/ND-CP on Purchase by
Foreign Investors of Shareholding in Vietnamese Commercial Banks
(Decree 69). Partner Bill
Magennis and Lawyer Julia Howes look at some of the key changes.

The revision of regulations on foreign share purchases
in Vietnamese shareholding banks, locally known as joint stock commercial banks
(JSCBs), has been anticipated by foreign investors for a long time. The
amendments were originally scheduled
to be finalised by the end of June 2004 under Decision 109-2004-QD-NHNN of the State Bank of
Vietnam, dated 30 January
2004.

Despite taking a number of key steps in 2005 and 2006 by drafting and
releasing the decree for public comment, the release of the final decree was
delayed. Technical difficulties in drafting the document were not the cause:
Decree 69 is a straightforward decree of only eight pages. However, political
sensitivities, other changes to the banking regulatory framework and World Trade
Organization accession have all played a part in the delay.

Decree 69 contains the following restrictions on foreign investment in JSCBs,
including JSCBs that are listed and State-owned banks undergoing 'equitization'
(a process akin to whole or partial privatisation):

The maximum number of shares that can be
owned by foreign investors and their affiliated persons combined is 30 per
cent. This is consistent with Part II of the Schedule of Specific Commitments
in Services to the Report of the Working Party on the Accession of Viet
Nam (WT/ACC/VNM/48).

The new reference to affiliated persons of foreign
investors is interesting. We understand that 'affiliated persons' includes
joint venture banks and wholly owned, foreign invested banks licensed in
Vietnam and, if so, reduces the attractiveness of establishing these entities.

A foreign strategic investor can have a shareholding
of up to 15 per cent of the charter capital of a JSCB, or 20 per cent if the
specific approval is given by the Prime Minister on the proposal of the
Governor of the State Bank of Vietnam. Therefore, the recent announcements
made by some foreign investors (such as United Overseas Bank, HSBC and
Deutsche Bank) that they have struck deals to acquire up to 20 per cent in a
JSCB will still require specific State Bank backing and Prime Ministerial
approval: Decree 69 does not give these investors a right to the entire
acquisition.

A strategic investor is defined as a reputable foreign credit
institution with financial capacity and ability to provide assistance to the JSCB during the development of banking products and services, raising
managerial and executive capability, and applying modern technology; and which
has strategic advantages connected with the strategy for development of the
JSCB, and which satisfies the specific criteria stipulated by the JSCB.

A
strategic investor must provide a written undertaking to provide assistance to
the JSCB in relation to the matters listed above. In earlier drafts, the
undertaking had to be made to the State Bank; in later drafts the undertaking
had to be made to the JSCB; but in the issued Decree 69 it is unclear to whom
the undertaking must be made. In the absence of direct language, we assume it
is only to the JSCB.

Other foreign credit institutions can have a
shareholding of up to 10 per cent only of the charter capital of a JSCB.

Foreign investors that are not a credit institution can have a
shareholding of up to 5 per cent only of the charter capital of a
JSCB.

The JSCB selling shares to foreign investors must satisfy the following
conditions:

Minimum charter capital of VND
one trillion.

Healthy financial status and meets the conditions
(unspecified) of the State Bank.

The management and executive structures, and the
internal inspection and audit systems, all operate effectively.

It has not received a penalty from the State Bank or another appropriate
authority in the past 24 months for breach of any regulations on safety (for
example, prudential regulations).

These conditions are new to the issued Decree 69; they did not appear in
earlier drafts. Exemptions are contemplated under Decree 69 but only on the
application of the State Bank to the Prime Minister, who is ultimately
responsible for granting the exemptions.

A foreign credit institution purchasing shares in a JSCB must satisfy the
following conditions:

Foreign strategic shareholders are restricted from assigning their shares in
a JSCB for a period of five years.

Foreign credit institutions (that are not strategic shareholders) holding
shares that equal 10 per cent of the charter capital of a JSCB are restricted
from assigning their shares for a period of three years.